GLADSTONE INVESTMENT CORPORATION All statements contained herein, other than historical facts, may constitute "forward-looking statements." These statements may relate to, among other things, our future operating results, our business prospects and the prospects of our portfolio companies, actual and potential conflicts of interest withGladstone Management Corporation (the "Adviser") and its affiliates, the use of borrowed money to finance our investments, the adequacy of our financing sources and working capital, and our ability to co-invest, among other factors. In some cases, you can identify forward-looking statements by terminology such as "estimate," "may," "might," "believe," "will," "provided," "anticipate," "future," "could," "growth," "plan," "project," "intend," "expect," "should," "would," "if," "seek," "possible," "potential," "likely" or the negative or variations of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include: (1) changes in the economy and the capital markets; (2) risks associated with negotiation and consummation of pending and future transactions; (3) the loss of one or more of our executive officers, in particularDavid Gladstone ,David Dullum , orTerry Lee Brubaker ; (4) changes in our investment objectives and strategy; (5) availability, terms (including the possibility of interest rate volatility) and deployment of capital; (6) changes in our industry, interest rates, exchange rates, regulation, or the general economy, including inflation; (7) our business prospects and the prospects of our portfolio companies; (8) the degree and nature of our competition; (9) changes in governmental regulation, tax rates and similar matters; (10) our ability to exit investments in a timely manner; (11) our ability to maintain our qualification as a regulated investment company ("RIC") and as a business development company ("BDC"); (12) the impact of COVID-19 generally and on the economy, the capital markets and our portfolio companies, including the measures taken by governmental authorities to address it, which may precipitate or exacerbate other risks and/or uncertainties; and (13) those factors described in Item 1A. "Risk Factors" herein and the "Risk Factors" sections of our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2022 , filed with theU.S. Securities and Exchange Commission ("SEC") onMay 11, 2022 (the "Annual Report"). We caution readers not to place undue reliance on any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements and future results could differ materially from historical performance. We have based forward-looking statements on information available to us on the date of this Quarterly Report on Form 10-Q (the "Quarterly Report"). Except as required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with theSEC , including subsequent annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements contained in this Quarterly Report are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended. In this Quarterly Report, the "Company," "we," "us," and "our" refer toGladstone Investment Corporation and its wholly-owned subsidiaries unless the context otherwise indicates. Dollar amounts, except per share amounts, are in thousands, unless otherwise indicated. The following analysis of our financial condition and results of operations should be read in conjunction with our accompanying Consolidated Financial Statements and the notes thereto contained elsewhere in this Quarterly Report and in our Annual Report. Historical financial condition and results of operations and percentage relationships among any amounts in the financial statements are not necessarily indicative of financial condition, results of operations or percentage relationships for any future periods. 43
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Table of Contents OVERVIEW General We were incorporated under the General Corporation Law of theState of Delaware onFebruary 18, 2005 . OnJune 22, 2005 , we completed our initial public offering and commenced operations. We operate as an externally managed, closed-end, non-diversified management investment company and have elected to be treated as a BDC under the Investment Company Act of 1940, as amended (the "1940 Act"). ForU.S. federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). To continue to qualify as a RIC forU.S. federal income tax purposes and obtain favorable RIC tax treatment, we must meet certain requirements, including certain minimum distribution requirements. We were established for the purpose of investing in debt and equity securities of established private businesses operating inthe United States ("U.S."). Our investment objectives are to: (i) achieve and grow current income by investing in debt securities of established businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness, and make distributions to our stockholders that grow over time; and (ii) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses, generally in combination with the aforementioned debt securities, that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our objectives, our investment strategy is to invest in several categories of debt and equity securities, with individual investments generally totaling up to$70 million , although investment size may vary depending upon our total assets or available capital at the time of investment. We expect that our investment portfolio over time will consist of approximately 75% in debt investments and 25% in equity investments, at cost. As ofDecember 31, 2022 , our investment portfolio was comprised of 77.2% in debt investments and 22.8% in equity investments, at cost. We focus on investing in lower middle market private businesses (which we generally define as companies with annual earnings before interest, taxes, depreciation and amortization ("EBITDA") of$3 million to$20 million ) ("Lower Middle Market") in theU.S. that meet certain criteria, including: the sustainability of the business' free cash flow and its ability to grow it over time, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the portfolio company, reasonable capitalization of the portfolio company, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples, and the potential to realize appreciation and gain liquidity in our equity position, if any. We anticipate that liquidity in our equity position will be achieved through a merger or acquisition of the portfolio company, a public offering of the portfolio company's stock, or, to a lesser extent, by exercising our right to require the portfolio company to repurchase our warrants, though there can be no assurance that we will always have these rights. We invest in portfolio companies that seek funds for management buyouts and/or growth capital to finance acquisitions, recapitalize or, to a lesser extent, refinance their existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises. We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity. InJuly 2012 , theSEC granted us an exemptive order (the "Co-Investment Order") that expanded our ability to co-invest, under certain circumstances, with certain of our affiliates, including Gladstone Capital and any future BDC or closed-end management investment company that is advised (or sub-advised if it controls the fund) by the Adviser, or any combination of the foregoing, subject to the conditions in the Co-Investment Order. We believe the Co-Investment Order has enhanced and will continue to enhance our ability to further our investment objectives and strategies. If we are participating in an investment with one or more co-investors, whether or not an affiliate of ours, our investment is likely to be smaller than if we were investing alone. We are externally managed by the Adviser, an investment adviser registered with theSEC and an affiliate of ours, pursuant to an investment advisory and management agreement (the "Advisory Agreement"). The Adviser manages our investment activities. We have also entered into an administration agreement withGladstone Administration, LLC , an affiliate of ours and the Adviser, whereby we pay separately for administrative services.
Our shares of common stock, our 5.00% Notes due 2026 ("2026 Notes"), and our 4.875% Notes due 2028 ("2028 Notes") are traded on the Nasdaq Global Select Market ("Nasdaq") under the trading symbols "GAIN," "GAINN," and "GAINZ," respectively.
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Table of Contents Business Portfolio Activity While the business environment remains competitive, we continue to see new investment opportunities consistent with our investment strategy of providing a combination of debt and equity in support of management and independent sponsor-led buyouts ofLower Middle Market companies in theU.S. During the nine months endedDecember 31, 2022 , we invested in one new portfolio company and exited two portfolio companies. From our initial public offering inJune 2005 throughDecember 31, 2022 , we invested in 56 companies, excluding investments in syndicated loans, for a total of approximately$1.6 billion , before giving effect to principal repayments and divestitures. The majority of the debt securities in our portfolio have a success fee component, which enhances the yield on our debt investments. Unlike paid-in-kind ("PIK") income, we generally do not recognize success fees as income until payment has been received. Due to the contingent nature of success fees, there are no guarantees that we will be able to collect any or all of these success fees or know the timing of any such collections. As a result, as ofDecember 31, 2022 , we had unrecognized, contractual success fees of$53.1 million , or$1.59 per common share. Consistent with accounting principles generally accepted in theU.S. ("GAAP"), we have not recognized success fee receivables and related income in our accompanying Consolidated Financial Statements until earned. From inception throughDecember 31, 2022 , we completed sales of 29 portfolio companies that we acquired under our buyout strategy (which excludes investments in syndicated loans). In the aggregate, these sales have generated$260.1 million in net realized gains and$40.4 million in other income upon exit, for a total increase to our net assets of$300.5 million . We believe, in aggregate, these transactions were equity-oriented investment successes and exemplify our investment strategy of striving to achieve returns through current income on the debt portion of our investments and capital gains from the equity portion. The 29 liquidity events have offset any realized losses since inception, which were primarily incurred during the 2008-2009 recession in connection with the sale of performing syndicated loans at a realized loss to pay off a former lender. The successful exits, in part, enabled us to increase the monthly distribution by 100.0% fromMarch 2011 throughDecember 31, 2022 , and allowed us to declare and pay 17 supplemental distributions to common stockholders throughDecember 31, 2022 . Capital Raising Efforts We have been able to meet our capital needs through extensions of and increases to the Fifth Amended and Restated Credit Agreement datedApril 30, 2013 , as amended from time to time (the "Credit Facility"), and by accessing the capital markets in the form of public offerings of unsecured notes, as well as common and preferred stock. We have successfully extended the Credit Facility's revolving period multiple times, most recently toFebruary 2024 , and currently have a total commitment amount of$180.0 million (with a potential total commitment of$300.0 million through additional commitments from new or existing lenders). During the year endedMarch 31, 2022 , we issued our 2028 Notes for gross proceeds of$134.6 million . During the nine months endedDecember 31, 2022 , we sold 241,978 shares of our common stock under our "at-the-market" program (the "Common Stock ATM Program") for gross proceeds of approximately$3.5 million . Refer to "Liquidity and Capital Resources - Revolving Line of Credit" for further discussion of the Credit Facility and to "Liquidity and Capital Resources - Equity - Common Stock" further discussion of our common stock. Although we have been able to access the capital markets historically, market conditions, including the impact of COVID-19, inflation, and rising interest rates, may continue to affect the trading price of our common stock and thus our ability to finance new investments through the issuance of common equity. OnDecember 31, 2022 , the closing market price of our common stock was$12.91 per share, representing a 3.9% discount to our net asset value ("NAV") of$13.43 per share as ofDecember 31, 2022 . When our common stock trades below NAV, our ability to issue additional equity is constrained by provisions of the 1940 Act, which generally prohibits the issuance and sale of our common stock at an issuance price below the then-current NAV per share without stockholder approval, other than through sales to our then-existing stockholders pursuant to a rights offering. ATM sales during the nine months endedDecember 31, 2022 were above our then-current estimated NAV per share.
Regulatory Compliance
Our ability to seek external debt financing, to the extent that it is available
under current market conditions, is further subject to the asset coverage
limitations of the 1940 Act, which require us to have asset coverage (as defined
in Sections 18
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and 61 of the 1940 Act), of at least 150% on each of our senior securities representing indebtedness and our senior securities that are stock (such as our previously outstanding series of term preferred stock).
OnApril 10, 2018 , our Board of Directors, including a "required majority" (as such term is defined in Section 57(o) of the 1940 Act) thereof, approved the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, our asset coverage requirements for senior securities changed from 200% to 150%, which was effective as ofApril 10, 2019 , one year after the date of the Board of Directors' approval.
As of
Investment Highlights
Investment Activity
During the nine months ended
•InMay 2022 , we invested an additional$6.4 million in the form of secured first lien debt inNocturne Villa Rentals, Inc. ("Nocturne") to fund an add-on acquisition. •InJune 2022 , we sold our investment inBassett Creek Services, Inc. ("Bassett Creek"), which resulted in success fee income of$3.0 million and a realized gain on preferred equity of$4.7 million . In connection with the sale, we received net cash proceeds of$57.6 million , including the repayment of our debt investment of$48.0 million at par. •InJune 2022 , we invested$21.0 million in a new portfolio company,Dema/Mai Holdings, Inc. ("Dema/Mai"), in the form of preferred equity to acquireMai Mechanical, LLC , a leading provider of plumbing and mechanical services focused on multi-family residential construction headquartered inDenver, Colorado , fromJ.R. Hobbs Co. - Atlanta, LLC ("J.R. Hobbs"), an existing portfolio company. InJuly 2022 , we invested an additional$39.1 million in the form of secured first lien debt in Dema/Mai to fund the acquisition of Dema Plumbing, a plumbing and mechanical systems installation and service provider to single-family residential homebuilders. •InJuly 2022 , we recapitalized our investment inHorizon Facilities Services, Inc. ("Horizon") and invested an additional$30.0 million in the form of secured first lien debt. In connection with this investment, we received equity proceeds of$12.3 million , which were recognized as a$10.1 million return of preferred equity cost basis and a realized gain of$2.2 million , as well as dividend income of$3.1 million and success fee income of$1.7 million . •InAugust 2022 , in conjunction with a refinancing atGinsey Home Solutions, Inc. ("Ginsey"), our$13.3 million secured second lien debt investment was reduced to$12.2 million and converted to secured first lien debt. The reduction in our cost basis was the result of a$5.1 million payment made by Ginsey to extinguish our secured borrowing liability, which was partially offset by an additional investment in Ginsey of$4.0 million .
•In
•InNovember 2022 , our$1.5 million secured second lien debt investment inCountry Club Enterprises, LLC ("CCE") was repaid at par. In connection with the repayment, we received success fee income of$1.1 million and our$1.0 million guaranty was released. •InDecember 2022 , we recapitalized our investment inOld World Christmas, Inc. ("Old World") and invested an additional$15.5 million in the form of secured first lien debt. In connection with this investment, we received proceeds of$17.9 million , of which$13.4 million was recognized as a realized gain and$4.5 million was recognized as dividend income. •InDecember 2022 , we entered into a new$3.2 million secured second lien term loan withThe Mountain Corporation ("The Mountain"), replacing our previously outstanding second lien term loan and second lien delayed draw term loan with an aggregate cost basis of$13.2 million , which resulted in a realized loss of$10.0 million . The new term loan has a stated interest rate of LIBOR + 10.3% and maturesOctober 1, 2024 . 46
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Table of Contents Recent Developments Distributions and Dividends
In
Record Date Payment Date Distribution per Common Share
January 20, 2023 January 31, 2023 $ 0.08
February 17, 2023 February 28, 2023 0.08
March 3, 2023 March 15, 2023 0.24 (A)
March 17, 2023 March 31, 2023 0.08
Total for the Quarter: $ 0.48
(A) Represents a supplemental distribution to common stockholders.
LIBOR Transition
In general, our investments in debt securities have a term of five years, accrue
interest at variable rates (based on the one-month London Interbank Offered Rate
("LIBOR")) and, to a lesser extent, at fixed rates. Most U.S. dollar LIBOR are
currently anticipated to be phased out in June 2023 . LIBOR is expected to
transition to a new standard rate, the Secured Overnight Financing Rate
("SOFR"), which will incorporate certain overnight repo market data collected
from multiple data sets. To attain an equivalent one-month rate, we currently
intend to adjust the SOFR to minimize the difference between the interest that a
borrower would be paying using LIBOR versus what it will be paying using
SOFR. We are currently monitoring the transition and cannot assure you whether
SOFR will become a standard rate for variable rate debt. We have amended all
outstanding loan agreements with our portfolio companies to include fallback
language providing a mechanism for the parties to negotiate a new reference
interest rate in the event that LIBOR ceases to exist. Assuming that SOFR
replaces LIBOR and is appropriately adjusted to equate to one-month LIBOR, we
expect that there should be minimal impact on our operations.
COVID-19 Impact
We continue to closely monitor and work with our portfolio companies to navigate the significant challenges created by the continuing COVID-19 pandemic, and remain focused on ensuring the safety of the Adviser's and Administrator's personnel and of the employees of our portfolio companies, while also managing our ongoing business activities. While we are closely monitoring all of our portfolio companies, our portfolio continues to be diverse from a geographic and industry perspective. Through proactive measures and continued diligence, the management teams of our portfolio companies have demonstrated their ability to respond effectively and efficiently to the challenges posed by COVID-19, including its variants, related orders imposed by state and local governments, including paused or reversed reopening orders, and operating challenges, including but not limited to, labor shortages, supply chain delays and increased material costs. We believe we have sufficient levels of liquidity to support our existing portfolio companies, as necessary, and continue our buyout strategy by deploying capital in new investment opportunities.
Impact of Inflation
We believe the effects of inflation on our historical results of operations and financial condition have been immaterial. During the nine months endedDecember 31, 2022 , general inflationary pressures and certain commodity price volatility have impacted our portfolio companies to varying degrees; however, the broad based impact of these pricing changes have largely been mitigated by price adjustments without adverse sales implications, and thus, have not materially impacted our portfolio companies' ability to service their indebtedness, including our loans. Notwithstanding the results to date, we expect that the cumulative effect of these inflationary pressures may impact the profit margins or sales of certain portfolio companies and their ability to service their debts. We continue to monitor the current inflationary environment to anticipate any impact on our portfolio companies, including their availability to pay interest on our loans. We cannot assure you that our results of operations and financial condition or that of our portfolio companies will not be materially impacted by inflation in the future. 47
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RESULTS OF OPERATIONS
Comparison of the Three Months Ended
For the
Three Months Ended
2022 2021 $ Change % Change
INVESTMENT INCOME
Interest income $ 16,067 $ 13,344 $ 2,723 20.4 %
Dividend and success fee income 5,527 3,398 2,129 62.7 %
Total investment income 21,594 16,742 4,852 29.0 %
EXPENSES
Base management fee 3,789 3,630 159 4.4 %
Loan servicing fee 2,080 1,768 312 17.6 %
Incentive fee 3,945 2,587 1,358 52.5 %
Administration fee 410 437 (27) (6.2) %
Interest and dividend expense 4,074 3,918 156 4.0 %
Amortization of deferred financing costs
and discounts 452 447 5 1.1 %
Other 1,111 1,006 105 10.4 %
Expenses before credits from Adviser 15,861 13,793 2,068 15.0 %
Credits to fees from Adviser (2,836) (5,450) 2,614 (48.0) %
Total expenses, net of credits to fees 13,025 8,343 4,682 56.1 %
NET INVESTMENT INCOME 8,569 8,399 170 2.0 %
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain on investments 3,844 22,049 (18,205) (82.6) %
Net unrealized appreciation (depreciation)
of investments 3,366 (20,102) 23,468 NM
Net realized and unrealized gain (loss) 7,210 1,947 5,263 270.3 %
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 15,779 $ 10,346 $ 5,433 52.5 %
WEIGHTED-AVERAGE SHARES OF COMMON STOCK
OUTSTANDING
Basic and diluted 33,316,055 33,205,023 111,032 0.3 %
BASIC AND DILUTED PER COMMON SHARE:
Net investment income $ 0.26 $ 0.25 $ 0.01 4.0 %
Net increase in net assets resulting from
operations $ 0.47 $ 0.31 $ 0.16 51.6 %
NM = Not Meaningful
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Total investment income increased 29.0% for the three months ended
Interest income from our investments in debt securities increased 20.4% for the three months endedDecember 31, 2022 , as compared to the prior year period. Generally, the level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period multiplied by the weighted-average yield. The weighted-average principal balance of our interest-bearing investment portfolio during the three months endedDecember 31, 2022 was$474.1 million , compared to$443.6 million for the prior year period. This increase was primarily due to the$105.4 million of follow-on debt investments in existing portfolio companies, the origination of$39.1 million of new debt investments, and$14.9 million of loans returned to accrual status, partially offset by$92.7 million of pay-offs, restructurings, or write-offs of debt investments, and$9.2 million of loans placed on non-accrual status, afterSeptember 30, 2021 , and their respective impact on the weighted-average principal balance when considering timing of new investments, pay-offs, restructurings, write-offs, and accrual status changes, as applicable. The weighted-average yield on our interest-bearing investments, excluding cash and cash equivalents and receipts recorded as dividend and success fee income, was 13.4% for the three months endedDecember 31, 2022 , compared to 11.9% for the prior year period. The weighted-average yield may vary from period to period, based on the current stated interest rate on interest-bearing investments, coupled with any collection of past due interest during the period. As ofDecember 31, 2022 , our loans toEdge Adhesives Holdings, Inc. ("Edge"),J.R. Hobbs and The Mountain were on non-accrual status, with an aggregate debt cost basis of$66.6 million . As ofDecember 31, 2021 , our loans toJ.R. Hobbs , The Mountain andSFEG Holdings, Inc. ("SFEG") were on non-accrual status, with an aggregate debt cost basis of$81.3 million . Dividend and success fee income for the three months endedDecember 31, 2022 increased$2.1 million from the prior year period. During the three months endedDecember 31, 2022 , dividend and success fee income consisted of$4.5 million of dividend income and$1.1 million of success fee income. During the three months endedDecember 31, 2021 , dividend and success fee income consisted of$3.4 million of success fee income.
As of
Expenses
Total expenses, net of any non-contractual, unconditional, and irrevocable
credits from the Adviser, increased 56.1% during the three months ended
In accordance with GAAP, we recorded a$1.4 million capital gains-based incentive fee during the three months endedDecember 31, 2022 , compared to a capital gains-based incentive fee of$0.4 million during the three months endedDecember 31, 2021 . The capital gains-based incentive fee was a result of the net impact of net realized gains and net unrealized appreciation (depreciation) on investments during the respective periods. The income-based incentive fee increased by$0.3 million for the three months endedDecember 31, 2022 , as compared to the prior year period, primarily due to an increase in pre-incentive fee net investment income, coupled with an increase in net assets, which drives the hurdle rate. The base management fee, loan servicing fee, incentive fee, and their related non-contractual, unconditional, and irrevocable credits are computed quarterly, as described under "Transactions with the Adviser" in Note 4 - Related Party Transactions in the accompanying Notes to Consolidated Financial Statements and are summarized in the following table: 49
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Three Months Ended December 31,
2022 2021
Average total assets subject to base management fee(A)
$ 726,000 Multiplied by prorated annual base management fee of 2.0% 0.5 % 0.5 % Base management fee(B) $ 3,789$ 3,630 Credits to fees from Adviser - other(B) (756) (3,682) Net base management fee $ 3,033 $ (52) Loan servicing fee(B) $ 2,080$ 1,768 Credits to base management fee - loan servicing fee(B) (2,080) (1,768) Net loan servicing fee $ - $ - Incentive fee - income-based $ 2,503$ 2,197 Incentive fee - capital gains-based(C) 1,442 390 Total incentive fee(B) $ 3,945$ 2,587 Credits to fees from Adviser - other(B) - - Net total incentive fee $ 3,945$ 2,587 (A)Average total assets subject to the base management fee is defined in the Advisory Agreement as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods. (B)Reflected as a line item on our Consolidated Statements of Operations. (C)The capital gains-based incentive fees are recorded in accordance with GAAP and do not necessarily reflect amounts contractually due under the terms of the Advisory Agreement. Interest and dividend expense increased 4.0% during the three months endedDecember 31, 2022 , as compared to the prior year period, due to an increase in interest expense. Interest expense increased by$0.2 million primarily due to higher interest expense related to the Credit Facility. The weighted-average balance outstanding on the Credit Facility during the three months endedDecember 31, 2022 was$26.1 million as compared to$21.2 million in the prior year period. The effective interest rate on the Credit Facility, excluding the impact of deferred financing costs, during the three months endedDecember 31, 2022 was 12.8%, as compared to 11.1% in the prior year period. The increase in the effective interest rate on the Credit Facility was primarily a result of an increase in interest rates on the drawn portion of the Credit Facility.
Realized and Unrealized Gain (Loss)
The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the three months endedDecember 31, 2022 and 2021 were as follows: 50
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Three Months Ended December 31, 2022
Unrealized Reversal of Unrealized
Realized Gain Appreciation (Appreciation)
Portfolio Company (Loss) (Depreciation) Depreciation Net Gain (Loss)
Brunswick Bowling Products, Inc. $ - $ 7,275 $ - $ 7,275
Mason West, LLC - 5,281 - 5,281
Old World Christmas, Inc. 13,371 (8,601) - 4,770
Dema/Mai Holdings, Inc. - 3,877 - 3,877
Nth Degree Investment Group, LLC - 3,845 - 3,845
Schylling, Inc. - 2,977 - 2,977
PSI Molded Plastics, Inc. - 2,976 - 2,976
The Mountain Corporation (10,000) - 10,000 -
ImageWorks Display and Marketing Group, - - (920)
Inc. (920)
Educators Resources, Inc. - (1,299) - (1,299)
J.R. Hobbs Co. - Atlanta, LLC - (2,398) - (2,398)
Galaxy Technologies Holding, Inc. - (3,255) - (3,255)
B+T Group Acquisition, Inc. - (3,747) - (3,747)
Nocturne Villas Rentals, Inc. - (4,182) - (4,182)
Horizon Facilities Service, Inc. - (8,267) - (8,267)
Other, net (<$1.0 million , net) 473 (197) 1 277
Total $ 3,844 $ (6,635) $ 10,001 $ 7,210
Three Months Ended December 31, 2021
Unrealized Reversal of Unrealized
Appreciation (Appreciation) Net Gain
Portfolio Company Realized Gain (Loss) (Depreciation) Depreciation (Loss)
Brunswick Bowling Products, Inc. $ - $ 10,344 $ - $ 10,344
Horizon Facilities Service, Inc. - 5,129 - 5,129
Schylling, Inc. - 2,931 - 2,931
ImageWorks Display and Marketing Group, - - 1,019
Inc. 1,019
The Maids International, LLC - (1,216) - (1,216)
J.R. Hobbs Co. - Atlanta, LLC - (1,575) - (1,575)
Mason West, LLC - (3,390) - (3,390)
Pioneer Square Brands, Inc. 21,939 - (25,425) (3,486)
Counsel Press, Inc. - (3,679) - (3,679)
Galaxy Technologies Holdings, Inc. - (4,464) - (4,464)
Other, net (<$1.0 million , net) 110 224 - 334
Total $ 22,049 $ 5,323 $ (25,425) $ 1,947 Net Realized Gain (Loss) on Investments
During the three months endedDecember 31, 2022 , we recorded net realized gains on investments of$3.8 million , primarily due to a$13.4 million realized gain from the recapitalization of Old World and$0.5 million of realized gains related to prior period exits of certain investments, partially offset by the$10.0 million realized loss recognized in conjunction with the replacement of our existing investment in The Mountain. During the three months endedDecember 31, 2021 , we recorded net realized gains on investments of$22.0 million , primarily due to a$21.9 million realized gain from the exit ofPioneer Square Brands, Inc. and realized gains related to prior period exits of certain investments. 51
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Net Unrealized Appreciation (Depreciation) of Investments
Net unrealized appreciation of investments of$3.4 million for the three months endedDecember 31, 2022 was primarily due to the reversal of unrealized depreciation of our investment in The Mountain upon the replacement of the existing investment, partially offset by net unrealized depreciation across our portfolio. The net unrealized depreciation was driven by decreased performance of certain of our portfolio companies and decreased comparable transaction multiples used to estimate the fair value of certain of our portfolio companies. These amounts were partially offset by increased performance of certain of our other portfolio companies, driven partially by the reversal of the impact of COVID-19 on certain of our portfolio companies and the markets in which they operate. In part, the performance of certain of our portfolio companies was driven by the impact COVID-19, and its variants, has had or is expected to have on our portfolio companies and the markets in which they operate, including government restrictions on the portfolio companies' ability to operate under historical conditions, current and future shutdowns and reopening restrictions, operating challenges, including but not limited to, labor shortages, supply chain delays, increased material costs and demand for their products, and general economic outlook, or the reversal of such impact towards pre-COVID-19 levels. Net unrealized depreciation of investments of$20.1 million for the three months endedDecember 31, 2021 was primarily due to the reversal of previously recorded unrealized appreciation of our investment in Pioneer upon its exit and the decreased performance of certain of our portfolio companies. These amounts were partially offset by the increased performance of certain of our other portfolio companies, driven partially by the reversal of the impact of COVID-19 on certain of our portfolio companies and the markets in which they operate, and increased comparable transaction multiples used to estimate the fair value of certain of our portfolio companies. In part, the performance of certain of our portfolio companies was driven by the impact COVID-19 has had or is expected to have on our portfolio companies and the markets in which they operate, including government restrictions on the portfolio companies' ability to operate under historical conditions, current and future shutdowns and reopening restrictions, operating challenges, including but not limited to, labor shortages, supply chain delays, increased material costs and demand for their products, and general economic outlook, or the reversal of such impact towards pre-COVID-19 levels. Across our entire investment portfolio, we recorded net unrealized appreciation of$7.2 million on our debt positions and depreciation of$3.9 million on our equity positions, for the three months endedDecember 31, 2022 . As ofDecember 31, 2022 , the fair value of our investment portfolio was more than the cost basis by$38.1 million , as compared toSeptember 30, 2022 , when the fair value of our investment portfolio was more than the cost basis by$34.7 million , representing net unrealized appreciation of$3.4 million for the three months endedDecember 31, 2022 . Our entire portfolio had a fair value of 105.3% of cost as ofDecember 31, 2022 . 52
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Comparison of the Nine Months Ended
For the
Nine Months Ended
2022 2021 $ Change % Change
INVESTMENT INCOME
Interest income $ 43,045 $ 43,634 $ (589) (1.3) %
Dividend and success fee income 18,641 9,672 8,969 92.7 %
Total investment income 61,686 53,306 8,380 15.7 %
EXPENSES
Base management fee 10,965 10,527 438 4.2 %
Loan servicing fee 5,754 5,430 324 6.0 %
Incentive fee 7,722 22,186 (14,464) (65.2) %
Administration fee 1,352 1,407 (55) (3.9) %
Interest and dividend expense 11,715 11,606 109 0.9 %
Amortization of deferred financing costs
and discounts 1,350 1,355 (5) (0.4) %
Other 4,357 3,828 529 13.8 %
Expenses before credits from Adviser 43,215 56,339 (13,124) (23.3) %
Credits to fees from Adviser (8,885) (11,293) 2,408 (21.3) %
Total expenses, net of credits to fees 34,330 45,046 (10,716) (23.8) %
NET INVESTMENT INCOME 27,356 8,260 19,096 231.2 %
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain on investments 10,598 24,442 (13,844) (56.6) %
Net realized loss on other - (1,998) 1,998 (100.0) %
Net unrealized appreciation (depreciation)
of investments (7,065) 54,916 (61,981) (112.9) %
Net realized and unrealized gain (loss) 3,533 77,360 (73,827) (95.4) %
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $ 30,889 $ 85,620 $ (54,731) (63.9) %
WEIGHTED-AVERAGE SHARES OF COMMON STOCK
OUTSTANDING
Basic and diluted 33,246,811 33,205,023 41,788 NM
BASIC AND DILUTED PER COMMON SHARE:
Net investment income $ 0.82 $ 0.25 $ 0.57 228.0 %
Net increase in net assets resulting from
operations $ 0.93 $ 2.58 $ (1.65) (64.0) %
NM = Not Meaningful
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Investment Income
Total investment income increased 15.7% for the nine months endedDecember 31, 2022 , as compared to the prior year period, due to an increase in dividend and success fee income, partially offset by a decrease in interest income. Interest income from our investments in debt securities decreased 1.3% for the nine months endedDecember 31, 2022 , as compared to the prior year period. During the nine months endedDecember 31, 2021 , we received$3.9 million of past due interest from certain loans that were previously on non-accrual status compared to no such collection in the current year period. Generally, the level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period multiplied by the weighted-average yield. The weighted-average principal balance of our interest-bearing investment portfolio during the nine months endedDecember 31, 2022 was$457.9 million , compared to$444.9 million for the prior year period. This increase was primarily due to$118.3 million of follow-on debt investments in existing portfolio companies, the origination of$60.7 million of new debt investments, and$14.9 million of loans returned to accrual status, partially offset by$106.8 million of pay-offs, restructurings, or write-offs of debt investments and$73.4 million of loans placed on non-accrual status afterMarch 31, 2021 , and their respective impact on the weighted-average principal balance when considering timing of new investments, pay-offs, restructurings, write-offs, and accrual status changes, as applicable. The weighted-average yield on our interest-bearing investments, excluding cash and cash equivalents and receipts recorded as dividend and success fee income, was 12.5% for the nine months endedDecember 31, 2022 , compared to 13.0% for the prior year period. The weighted-average yield may vary from period to period, based on the current stated interest rate on interest-bearing investments, coupled with any collection of past due interest during the period. During the nine months endedDecember 31, 2021 , we collected$3.9 million in past due interest from portfolio companies that were previously on non-accrual status, including$2.8 million from B+T Group Acquisition, Inc.,$1.0 million fromSOG Specialty Knives and Tools, LLC ,$0.1 million fromPSI Molded Plastics, Inc. , and$0.1 million from Horizon. We had no collections of past due interest during the nine months endedDecember 31, 2022 . As ofDecember 31, 2022 , our loans to Edge,J.R. Hobbs and The Mountain were on non-accrual status, with an aggregate debt cost basis of$66.6 million . As ofDecember 31, 2021 , our loans toJ.R. Hobbs , The Mountain and SFEG were on non-accrual status, with an aggregate debt cost basis of$81.3 million . Dividend and success fee income for the nine months endedDecember 31, 2022 increased$9.0 million from the prior year period. During the nine months endedDecember 31, 2022 , dividend and success fee income consisted of$10.8 million of dividend income and$7.8 million of success fee income. During the nine months endedDecember 31, 2021 , dividend and success fee income consisted primarily of$8.1 million of success fee income and$1.6 million of dividend income.
As of
Expenses
Total expenses, net of any non-contractual, unconditional, and irrevocable credits from the Adviser, decreased 23.8% during the nine months endedDecember 31, 2022 , as compared to the prior year period, primarily due to a decrease in the incentive fee. In accordance with GAAP, we recorded a$0.7 million capital gains-based incentive fee during the nine months endedDecember 31, 2022 , compared to a$16.3 million capital gains-based incentive fee recorded during the nine months endedDecember 31, 2021 . The capital gains-based incentive fee was a result of the net impact of net realized gains and net unrealized appreciation (depreciation) on investments during the respective periods. The income-based incentive fee increased by$1.1 million for the nine months endedDecember 31, 2022 , as compared to the prior year period, primarily due to an increase in pre-incentive fee net investment income, coupled with an increase in net assets, which drives the hurdle rate. 54
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The base management fee, loan servicing fee, incentive fee, and their related non-contractual, unconditional, and irrevocable credits are computed quarterly, as described under "Transactions with the Adviser" in Note 4 -Related Party Transactions in the accompanying Notes to Consolidated Financial Statements and are summarized in the following table: Nine Months
Ended
2022 2021
Average total assets subject to base management fee(A)
$ 701,800 Multiplied by prorated annual base management fee of 2.0% 1.5 % 1.5 % Base management fee(B)$ 10,965 $ 10,527 Credits to fees from Adviser - other(B) (3,131) (5,863) Net base management fee$ 7,834 $ 4,664 Loan servicing fee(B)$ 5,754 $ 5,430 Credits to base management fee - loan servicing fee(B) (5,754) (5,430) Net loan servicing fee $ - $ - Incentive fee - income-based$ 7,016 $ 5,892 Incentive fee - capital gains-based(C) 706 16,294 Total incentive fee(B)$ 7,722 $ 22,186 Credits to fees from Adviser - other(B) - - Net total incentive fee$ 7,722 $ 22,186 (A)Average total assets subject to the base management fee is defined in the Advisory Agreement as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods. (B)Reflected as a line item on our Consolidated Statements of Operations. (C)The capital gains-based incentive fees are recorded in accordance with GAAP and do not necessarily reflect amounts contractually due under the terms of the Advisory Agreement. Interest and dividend expense increased 0.9% during the nine months endedDecember 31, 2022 , as compared to the prior year period, due to an increase in interest expense, partially offset by a decrease in dividend expense. Interest expense increased by$2.4 million primarily due to the issuance of the 2028 Notes inAugust 2021 , which was partially offset by lower interest expense related to the Credit Facility. The weighted-average balance outstanding on the Credit Facility during the nine months endedDecember 31, 2022 , was$12.6 million as compared to$24.0 million in the prior year period. The effective interest rate on the Credit Facility, excluding the impact of deferred financing costs, during the nine months endedDecember 31, 2022 was 19.8%, as compared to 10.1% in the prior year period. The increase in the effective interest rate on the Credit Facility was primarily a result of an increase in unused commitments fees on the undrawn portion of the Credit Facility as well as increased interest rates on the drawn portion of the Credit Facility. Dividend expense decreased by$2.3 million as a result of the 6.375% Series E Cumulative Term Preferred Stock ("Series E Term Preferred Stock") redemptionAugust 2021 . 55
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Realized and Unrealized Gain (Loss)
The realized gains (losses) and unrealized appreciation (depreciation) across our investments for the nine months endedDecember 31, 2022 and 2021 were as follows: Nine Months Ended December 31, 2022 Unrealized Reversal of Unrealized Appreciation (Appreciation) Net Gain Portfolio Company Realized Gain (Loss) (Depreciation) Depreciation (Loss) Brunswick Bowling Products, Inc $ - $ 13,770 $ -$ 13,770 Nth Degree Investment Group, LLC - 11,525 - 11,525 Old World Christmas, Inc. 13,371 (2,815) - 10,556 Horizon Facilities Service, Inc. 2,218 5,461 - 7,679 Nocturne Villa Rentals, Inc. - 4,635 - 4,635 Dema/Mai Holdings, Inc. - 3,877 - 3,877 SFEG Holdings, Inc. - 3,505 - 3,505 Mason West, LLC - 3,343 - 3,343 Counsel Press, Inc. - 2,165 - 2,165 Schylling Inc. - 1,633 - 1,633 Utah Pacific Bridge & Steel, Ltd. - (1,206) - (1,206) Educators Resources, Inc. - (1,614) - (1,614) The Maids International, LLC - (2,679) - (2,679) The Mountain Corporation (10,000) (2,930) 10,000 (2,930) Ginsey Home Solutions, Inc. - (3,263) - (3,263) ImageWorks Display and Marketing Group, - - (3,273) Inc. (3,273) Galaxy Technologies Holdings, Inc. - (4,804) - (4,804) Edge Adhesives Holdings, Inc - (5,395) - (5,395) Bassett Creek Services, Inc. 5,188 - (12,250) (7,062) B+T Group Acquisition, Inc - (13,014) - (13,014) J.R. Hobbs Co. - Atlanta, LLC - (13,966) - (13,966) Other, net (<$1.0 million , net) (179) 244 (14) 51 Total $ 10,598 $ (4,801) $ (2,264)$ 3,533 56
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Nine Months Ended
Unrealized Reversal of Unrealized
Realized Gain Appreciation (Appreciation) Net Gain
Portfolio Company (Loss) (Depreciation) Depreciation (Loss)
B+T Group Acquisition, Inc. $ - $ 15,279 $ - $ 15,279
Brunswick Bowling Products, Inc. - 13,842 - 13,842
Old World Christmas, Inc. - 13,559 - 13,559
Schylling, Inc. - 13,453 - 13,453
Horizon Facilities Service, Inc. - 11,547 - 11,547
Educators Resource, Inc. - 8,876 - 8,876
Bassett Creek Services, Inc. - 7,877 - 7,877
SOG Specialty Knives & Tools, LLC - 7,575 - 7,575
ImageWorks Display and Marketing Group, - - 6,321
Inc. 6,321
PSI Molded Plastics, Inc. - 3,633 - 3,633
Counsel Press, Inc. - 3,366 - 3,366
Nocturne Villa Rentals, Inc. - 1,504 - 1,504
Galaxy Technologies Holdings, Inc. - 1,404 - 1,404
Head Country, Inc. 3,627 - (2,469) 1,158
Channel Technologies Group, LLC (1,841) - 1,841 -
Diligent Delivery Systems - (903) - (903)
Mason West, LLC - (2,217) - (2,217)
SBS Industries Holdings, Inc. - (3,314) - (3,314)
Ginsey Home Solutions, Inc. - (4,012) - (4,012)
J.R. Hobbs Co. - Atlanta, LLC - (4,085) - (4,085)
Pioneer Square Brands, Inc. 21,939 (1,245) (25,425) (4,731)
Galaxy Technologies Holdings, Inc. - (10,784) - (10,784)
Other, net (<$1.0 million , net) 717 (759) 52 10
Total $ 24,442 $ 80,917 $ (26,001) $ 79,358 Net Realized Gain (Loss) on Investments
During the nine months endedDecember 31, 2022 , we recorded net realized gains on investments of$10.6 million , primarily due to a$13.4 million realized gain from the recapitalization of Old World,$5.2 million of realized gains from the exit of Bassett Creek, of which$0.5 million was received in the three months endedDecember 31, 2022 , and a$2.2 million realized gain from the recapitalization of Horizon. These amounts were partially offset by the$10.0 million realized loss recognized in conjunction with the replacement of the existing investment in The Mountain and$0.2 million of net realized losses related to prior period exits of certain investments. During the nine months endedDecember 31, 2021 , we recorded net realized gains on investments of$24.4 million , primarily related to a$21.9 million realized gain from the exit ofPioneer Square Brands, Inc. , a$3.6 million realized gain from the exit ofHead Country, Inc. ("Head Country") and$0.7 million of realized gains related to previous exits of certain investments, partially offset by a$1.8 million realized loss from the dissolution ofChannel Technologies Group, LLC ("CTG").
Net Realized Gain Loss on Other
During the nine months endedDecember 31, 2021 , we recorded a net realized loss on other of$2.0 million related to unamortized deferred issuance costs written off upon the redemption of our Series E Term Preferred Stock inAugust 2021 . During the nine months endedDecember 31, 2022 , there were no realized gains or losses on other. 57
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Net Unrealized Appreciation (Depreciation) of Investments
Net unrealized depreciation of investments of$7.1 million for the nine months endedDecember 31, 2022 was primarily due to the net unrealized depreciation across our portfolio as well as the reversal of unrealized appreciation of our investment inBassett Creek upon its exit and the reversal of unrealized depreciation of our investment in The Mountain upon the replacement of our existing investment. The net depreciation was driven primarily by decreased performance of certain of our other portfolio companies and decreased comparable transaction multiples used to estimate the fair value of certain of our portfolio companies. These decreases were partially offset by increased performance of certain of our portfolio companies, driven partially by the reversal of the impact of COVID-19 on certain of our portfolio companies and the markets in which they operate. In part, the performance of certain of our portfolio companies was driven by the impact COVID-19, and its variants, has had or is expected to have on our portfolio companies and the markets in which they operate, including government restrictions on the portfolio companies' ability to operate under historical conditions, current and future shutdowns and reopening restrictions, operating challenges, including but not limited to, labor shortages, supply chain delays, increased material costs and demand for their products, and general economic outlook, or the reversal of such impact towards pre-COVID-19 levels. Net unrealized appreciation of investments of$54.9 million for the nine months endedDecember 31, 2021 was primarily due to increased performance of certain of our portfolio companies, driven partially by the reversal of the impact of COVID-19 on certain of our portfolio companies and the markets in which they operate, increased comparable multiples used to estimate the fair value of certain of our portfolio companies and the reversal of previously recorded unrealized depreciation of our investments in CTG upon its dissolution. These amounts were partially offset by the reversal of previously recorded unrealized appreciation of our investment in Pioneer and Head Country upon exit and the decreased performance of certain of our portfolio companies. In part, the performance of certain of our portfolio companies was driven by the impact COVID-19 has had or is expected to have on our portfolio companies and the markets in which they operate, including government restrictions on the portfolio companies' ability to operate under historical conditions, current and future shutdowns and reopening restrictions, operating challenges, including but not limited to, labor shortages, supply chain delays, increased material costs and demand for their products, and general economic outlook, or the reversal of such impact towards pre-COVID-19 levels. Across our entire investment portfolio, we recorded net unrealized depreciation of$16.1 million on our debt positions and appreciation of$9.1 million on our equity positions, for the nine months endedDecember 31, 2022 . As ofDecember 31, 2022 , the fair value of our investment portfolio was more than the cost basis by$38.1 million , as compared toMarch 31, 2022 , when the fair value of our investment portfolio was more than the cost basis by$45.1 million , representing net unrealized depreciation of$7.1 million for the nine months endedDecember 31, 2022 . Our entire portfolio had a fair value of 105.3% of cost as ofDecember 31, 2022 .
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Net cash used in operating activities for the nine months endedDecember 31, 2022 was$13.4 million , compared to net cash provided by operating activities of$39.3 million for the nine months endedDecember 31, 2021 . This change was primarily due to an increase in purchase of investments and a decrease in the aggregate of principal repayments of investments and net proceeds from the sale of investments.
Purchases of investments were
As of
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The following table summarizes our total portfolio investment activity during
the nine months ended
Nine
Months Ended
2022 2021
Beginning investment portfolio, at fair value $ 714,396 $ 633,829
New investments 60,050 34,200
Disbursements to existing portfolio companies 73,456 50,350
Unscheduled principal repayments (A) (55,398) (46,898)
Net proceeds from sale and recapitalization of investments (35,533) (49,421)
Net realized gain on investments 10,545 23,748
Net unrealized appreciation (depreciation) of investments (4,801) 80,917
Reversal of net unrealized appreciation of investments (2,264) (26,001)
Amortization of premiums, discounts, and acquisition costs, 12 14
net
Ending investment portfolio, at fair value $
760,463
(A)The nine months ended
The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as ofDecember 31, 2022 : Amount For the remaining three months ending March 31, 2023$ 27,500 For the fiscal years endingMarch 31 : 2024 55,468 2025 89,614 2026 202,419 2027 144,096 Thereafter 38,250 Total contractual repayments$ 557,347 Investments in equity securities 165,033 Total cost basis of investments held as of December 31, 2022:$ 722,380 Financing Activities Net cash provided by financing activities for the nine months endedDecember 31, 2022 was$1.8 million , which consisted primarily of$29.6 million of net borrowings under the Credit Facility and$3.4 million of proceeds from issuance of common stock, net of expenses and shelf offering registration costs, partially offset by$30.9 million in distributions to common stockholders. Net cash used in financing activities for the nine months endedDecember 31, 2021 was$13.0 million , which consisted primarily of the redemption of our Series E Term Preferred Stock of$94.4 million ,$27.4 million in distributions to common stockholders,$22.4 million of net repayments under the Credit Facility and$3.4 million of deferred financing and offering costs, partially offset by$134.6 million in gross proceeds from the issuance of our 2028 Notes.
Distributions and Dividends to Stockholders
Common Stock Distributions
To qualify to be taxed as a RIC and thus avoid corporate level federal income
tax on the income we distribute to our stockholders, we are required, among
other requirements, to distribute to our stockholders on an annual basis at
least 90% of our taxable ordinary income plus the excess of our net short-term
capital gains over net long-term capital losses ("Investment Company Taxable
Income"), determined without regard to the dividends paid deduction.
Additionally, the Credit Facility generally restricts the amount of
distributions to stockholders that we can pay out to be no greater than the sum
of certain amounts, including our net investment income, plus net capital gains,
plus amounts elected by the Company to be considered as having been paid during
the prior fiscal year in accordance with Section 855(a) of the Code. In
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accordance with these requirements, our Board of Directors declared, and we paid, monthly cash distributions of$0.075 per common share for each of the six months from April throughSeptember 2022 , monthly cash distributions of$0.08 per common share for each of the three months from October throughDecember 2022 , and supplemental distributions of$0.12 per common share in June andDecember 2022 . See also "Recent Developments - Distributions and Dividends" for a discussion of cash distributions to common stockholders declared by our Board of Directors inJanuary 2023 . For the fiscal year endedMarch 31, 2022 , Investment Company Taxable Income exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat$13.9 million of the first distributions paid subsequent to fiscal year-end as having been paid in the prior year. In addition, for the fiscal year endedMarch 31, 2022 , net capital gains exceeded distributions declared and paid, and, in accordance with Section 855(a) of the Code, we elected to treat$15.7 million of the first distributions paid subsequent to fiscal year-end as having been paid in the prior year. For the year endedMarch 31, 2022 , we recorded$2.8 million of net adjustments for estimated permanent book-tax differences to reflect tax character, which decreased Capital in excess of par value and Overdistributed net investment income and increased Accumulated net realized gain in excess of distributions. For the nine months endedDecember 31, 2022 , we recorded$1.6 million of net adjustments for estimated permanent book-tax differences to reflect tax character, which decreased Capital in excess of par value and increased Underdistributed net investment income and Accumulated net realized gain in excess of distributions.
Preferred Stock Dividends
Our Board of Directors declared and we paid monthly cash dividends of$0.1328125 per share to holders of our Series E Term Preferred Stock per month from April throughJuly 2021 and$0.07968750 per share of our Series E Term Preferred Stock for the period fromAugust 1, 2021 up to, but excluding, the redemption date ofAugust 19, 2021 . In accordance with GAAP, we treat these monthly dividends as an operating expense. Dividend Reinvestment Plan Our common stockholders who hold their shares through our transfer agent,Computershare, Inc. ("Computershare"), have the option to participate in a dividend reinvestment plan offered by Computershare, as the plan agent. This is an "opt in" dividend reinvestment plan, meaning that common stockholders may elect to have their cash distributions automatically reinvested in additional shares of our common stock. Common stockholders who do not make such election will receive their distributions in cash. Any distributions reinvested under the plan will be taxable to a common stockholder to the same extent, and with the same character, as if the common stockholder had received the distribution in cash. The common stockholder generally will have an adjusted basis in the additional common shares purchased through the plan equal to the dollar amount that would have been received if theU.S. stockholder had received the dividend or distribution in cash. The additional common shares will have a new holding period commencing on the day following the date on which the shares are credited to the common stockholder's account. Computershare purchases shares in the open market in connection with the obligations under the plan. The Computershare dividend reinvestment plan is not open to holders of our preferred stock.
Equity
Registration Statement
OnSeptember 3, 2021 , we filed a registration statement on Form N-2 (File No. 333-259302), which theSEC declared effective onOctober 15, 2021 . The registration statement permits us to issue, through one or more transactions, up to an aggregate of$300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities, and warrants to purchase common stock, preferred stock, or debt securities, including through concurrent, separate offerings of such securities. As of the date of this report, we have the ability to issue up to$296.5 million of the securities registered under the registration statement. Common Stock InDecember 2019 , we entered into equity distribution agreements withWedbush Securities, Inc. ,Cantor Fitzgerald & Co. , andLadenburg Thalmann & Co., Inc. , under which we had the ability to issue and sell shares of our common stock, from time to time, through such sales agents, up to an aggregate offering price of$35.0 million . OnAugust 11, 2021 , we terminated the equity distribution agreements with each of such sales agents. We did not sell any shares of our common stock under this ATM program during the year endedMarch 31, 2022 . 60
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InAugust 2022 , we entered into equity distribution agreements withOppenheimer & Co. andVirtu Americas LLC (each a "Sales Agent"), under which we have the ability to issue and sell shares of our common stock, from time to time, through the Sales Agents, up to an aggregate offering price of$50.0 million in what is commonly referred to as an "at-the-market" program ("Common Stock ATM Program"). As ofDecember 31, 2022 , we had remaining capacity to sell up to an additional$46.5 million of common stock under the Common Stock ATM program. During the three months endedDecember 31, 2022 , we sold 212,338 shares of our common stock under the Common Stock ATM Program at a weighted-average gross price of$14.11 per share, raising approximately$3.0 million of gross proceeds. The weighted-average net price per share, after deducting commissions and offering costs borne by us, was$13.91 and resulted in total net proceeds of approximately$3.0 million . These sales were above our then current estimated NAV per share. During the nine months endedDecember 31, 2022 , we sold 241,978 shares of our common stock under the Common Stock ATM Program at a weighted-average gross price of$14.31 per share, raising approximately$3.5 million of gross proceeds. The weighted-average net price per share, after deducting commissions and offering costs borne by us, was$14.11 and resulted in total net proceeds of approximately$3.4 million . These sales were above our then current estimated NAV per share. Subsequent toDecember 31, 2022 and throughFebruary 1, 2023 , we sold 8,484 shares of our common stock under our Common Stock ATM Program at a weighted-average gross price of$14.01 per share and raised approximately$0.1 million in net proceeds. These sales were above our then-current estimated NAV per share. We anticipate issuing equity securities to obtain additional capital in the future. However, we cannot determine the timing or terms of any future equity issuances or whether we will be able to issue equity on terms favorable to us, or at all. When our common stock is trading at a price below NAV per share, the 1940 Act places regulatory constraints on our ability to obtain additional capital by issuing common stock. Generally, the 1940 Act provides that we may not issue and sell our common stock at a price below our NAV per common share, other than to our then-existing common stockholders pursuant to a rights offering, without first obtaining approval from our stockholders and our independent directors and meeting other stated requirements. OnDecember 31, 2022 , the closing market price of our common stock was$12.91 per share, representing a 3.9% discount to our NAV per share of$13.43 as ofDecember 31, 2022 . Term Preferred Stock InAugust 2018 , we completed a public offering of 2,990,000 shares of our Series E Term Preferred Stock at a public offering price of$25.00 per share. Gross proceeds totaled$74.8 million and net proceeds, after deducting underwriting discounts and offering costs borne by us, were$72.1 million . Total underwriting discounts and offering costs related to this offering were$2.7 million , which have been recorded as discounts to the liquidation value on our accompanying Consolidated Statements of Assets and Liabilities and were amortized over the period endingAugust 31, 2025 , the mandatory redemption date, prior to redemption inAugust 2021 . Prior to redemption inAugust 2021 , the Series E Term Preferred Stock provided for a fixed dividend equal to 6.375% per year, payable monthly. InMay 2020 , we entered into sales agreements withWedbush Securities, Inc. andVirtu Americas LLC (each a "Series E ATM Sales Agent"), under which we had the ability to issue and sell shares of our Series E Term Preferred Stock, from time to time, through the Series E ATM Sales Agents, up to$50.0 million aggregate liquidation preference in the Series E ATM Program. OnAugust 10, 2021 , we terminated our sales agreements with each of the Series E ATM Sales Agents. We did not sell any shares of our Series E Term Preferred Stock under the Series E ATM Program during the year endedMarch 31, 2022 . InMarch 2021 , we used a portion of the proceeds from the issuance of our 2026 Notes, to voluntarily redeem all outstanding shares of our Series D Term Preferred Stock, which had a liquidation preference of$25.00 per share. In connection with the voluntary redemption, we incurred a loss on extinguishment of debt of$0.8 million , which was recorded in Realized loss on other in our Consolidated Statements of Operations and which was primarily comprised of unamortized deferred issuance costs at the time of redemption. Prior to redemption inMarch 2021 , the Series D Term Preferred Stock provided for a fixed dividend equal to 6.25% per year, payable monthly, and would have otherwise been subject to mandatory redemption onSeptember 30, 2023 . 61
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InAugust 2021 , we used a portion of the proceeds from the issuance of our 2028 Notes, to voluntarily redeem all outstanding shares of our Series E Term Preferred Stock, which had a liquidation preference of$25.00 per share. In connection with the voluntary redemption, we incurred a loss on extinguishment of debt of$2.0 million , which was recorded in Realized loss on other in our accompanying Consolidated Statements of Operations and which was primarily comprised of unamortized deferred issuance costs at the time of redemption.
Revolving Line of Credit
OnMarch 8, 2021 , we, through our wholly-owned subsidiary,Gladstone Business Investment, LLC ("Business Investment "), entered into Amendment No. 6 to the Credit Facility withKeyBank National Association ("KeyBank") as administrative agent, lead arranger, managing agent and lender, the Adviser, as servicer, and certain other lenders party thereto. The revolving period was extended toFebruary 29, 2024 , and if not renewed or extended by such date, all principal and interest will be due and payable onFebruary 28, 2026 (two years after the revolving period end date). As ofDecember 31, 2022 , the Credit Facility provided a one-year extension option that may be exercised on or beforeMarch 8, 2023 , subject to approval by all lenders. OnAugust 10, 2020 , we, throughBusiness Investment , entered into Amendment No. 5 to the Credit Facility. Among other things, Amendment No. 5 amended the Credit Facility to (i) add LIBOR replacement language; (ii) implement a 0.5% LIBOR floor; (iii) reduce the facility size from$200.0 million to$180.0 million , which may be expanded to$300.0 million through additional commitments; and (iv) provide certain other changes to existing terms and covenants. Advances under the Credit Facility generally bear interest at 30-day LIBOR, subject to a floor of 0.5%, plus 2.85% per annum untilFebruary 29, 2024 , with the margin then increasing to 3.10% for the period fromFebruary 29, 2024 toFebruary 28, 2025 , and increasing further to 3.35% thereafter. The Credit Facility has an unused commitment fee on the daily unused commitment amount of 0.50% per annum if the average unused commitment amount for the period is less than or equal to 50% of the total commitment amount, 0.75% per annum if the average unused commitment amount for the period is greater than 50% but less than or equal to 65% of the total commitment amount, and 1.00% per annum if the average unused commitment amount for the period is greater than 65% of the total commitment amount. AtDecember 31, 2022 , we had$29.6 million borrowings outstanding on the Credit Facility and as of the date of this report, we had$31.3 million outstanding under the Credit Facility. Interest is payable monthly during the term of the Credit Facility. Available borrowings are subject to various constraints and applicable advance rates, which are generally based on the size, characteristics, and quality of the collateral pledged byBusiness Investment . The Credit Facility also requires that any interest and principal payments on pledged loans be remitted directly by the borrower into a lockbox account withKeyBank .KeyBank is also the trustee of the account and generally remits the collected funds to us once a month. Among other things, the Credit Facility contains covenants that requireBusiness Investment to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions) and restrict certain material changes to our credit and collection policies without the lenders' consent. The Credit Facility also generally seeks to restrict distributions to stockholders to the sum of (i) our net investment income, (ii) net capital gains, and (iii) amounts deemed by the Company to be considered as having been paid during the prior fiscal year in accordance with Section 855(a) of the Code. Loans eligible to be pledged as collateral are subject to certain limitations, including, among other things, restrictions on geographic concentrations, industry concentrations, loan size, payment frequency and status, average life, portfolio company leverage, and lien property. The Credit Facility also requiresBusiness Investment to comply with other financial and operational covenants, which obligateBusiness Investment to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of obligors required in the borrowing base. Additionally, the Credit Facility contains a performance guaranty that requires the Company to maintain (i) a minimum net worth (defined in the Credit Facility to include our mandatory redeemable term preferred stock) of the greater of$210.0 million or$210.0 million plus 50% of all equity and subordinated debt raised, minus 50% of any equity or subordinated debt redeemed or retired afterNovember 16, 2016 , which equated to$288.0 million as ofDecember 31, 2022 , (ii) asset coverage with respect to senior securities representing indebtedness of at least 150% (or such percentage as may be set forth in Section 18 of the 1940 Act, as modified by Section 61 of the 1940 Act), and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code. As ofDecember 31, 2022 , and as defined in the performance guaranty of the Credit Facility, we had a net worth of$705.7 million , asset coverage on our senior securities representing indebtedness of 250.5%, calculated in compliance with the requirements of Sections 18 and 61 of the 1940 Act, and an active status as a BDC and RIC. As ofDecember 31, 2022 , we had availability, after adjustments for 62
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various constraints based on collateral quality, of
Notes Payable 5.00% Notes due 2026 InMarch 2021 , we completed a public offering of the 2026 Notes with an aggregate principal amount of$127.9 million , which resulted in net proceeds of approximately$123.8 million after deducting underwriting discounts, commissions and offering costs borne by us. The 2026 Notes are traded under the ticker symbol "GAINN" on Nasdaq. The 2026 Notes will mature onMay 1, 2026 and may be redeemed in whole or in part at any time or from time to time at the Company's option on or afterMay 1, 2023 . The 2026 Notes bear interest at a rate of 5.00% per year (which equates to$6.4 million per year), payable quarterly in arrears. The indenture relating to the 2026 Notes contains certain covenants, including (i) an inability to incur additional debt or issue additional debt or preferred securities unless the Company's asset coverage meets the threshold specified in the 1940 Act after such borrowing, (ii) an inability to declare any dividend or distribution (except a dividend payable in our stock) on a class of our capital stock or to purchase shares of our capital stock unless the Company's asset coverage meets the threshold specified in the 1940 Act at the time of (and giving effect to) such declaration or purchase, and (iii) if, at any time, we are not subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), we will provide the holders of the 2026 Notes and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements. The 2026 Notes are recorded at the aggregate principal amount, less underwriting discounts, commissions, and offering costs, on our accompanying Consolidated Statements of Assets and Liabilities. Total underwriting discounts, commissions, and offering costs related to this offering were$4.1 million , which have been recorded as discounts to the aggregate principal amount on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized over the period endingMay 1, 2026 , the maturity date.
4.875% Notes due 2028
InAugust 2021 , we completed a public offering of the 2028 Notes with an aggregate principal amount of$134.6 million , which resulted in net proceeds of approximately$131.3 million after deducting underwriting discounts, commissions and offering costs borne by us. The 2028 Notes are traded under the ticker symbol "GAINZ" on Nasdaq. The 2028 Notes will mature onNovember 1, 2028 and may be redeemed in whole or in part at any time or from time to time at the Company's option on or afterNovember 1, 2023 . The 2028 Notes bear interest at a rate of 4.875% per year (which equates to$6.6 million per year), payable quarterly in arrears. The indenture relating to the 2028 Notes contains certain covenants, including (i) an inability to incur additional debt or issue additional debt or preferred securities unless the Company's asset coverage meets the threshold specified in the 1940 Act after such borrowing, (ii) an inability to declare any dividend or distribution (except a dividend payable in our stock) on a class of our capital stock or to purchase shares of our capital stock unless the Company's asset coverage meets the threshold specified in the 1940 Act at the time of (and giving effect to) such declaration or purchase, and (iii) if, at any time, we are not subject to the reporting requirements of the Exchange Act, we will provide the holders of the 2028 Notes and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements. The 2028 Notes are recorded at the aggregate principal amount, less underwriting discounts, commissions, and offering costs, on our accompanying Consolidated Statements of Assets and Liabilities. Total underwriting discounts, commissions, and offering costs related to this offering were$3.3 million , which have been recorded as discounts to the aggregate principal amount on our accompanying Consolidated Statements of Assets and Liabilities and are being amortized over the period endingNovember 1, 2028 , the maturity date. 63
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OFF-BALANCE SHEET ARRANGEMENTS
Unlike PIK income, we generally do not recognize success fees as income until payment has been received. Due to the contingent nature of success fees, there are no guarantees that we will be able to collect any or all of these success fees or know the timing of any such collections. As a result, as ofDecember 31, 2022 andMarch 31, 2022 , we had unrecognized, contractual off-balance sheet success fee receivables of$53.1 million and$50.5 million (or approximately$1.59 and$1.52 per common share), respectively, on our debt investments. Consistent with GAAP, we have not recognized success fee receivables and related income in our accompanying Consolidated Financial Statements until earned.
CONTRACTUAL OBLIGATIONS
We have line of credit and delayed draw term debt commitments to certain of our portfolio companies that have not been fully drawn. Since these line of credit and delayed draw term debt commitments have expiration dates and we expect many will never be fully drawn, the total line of credit and delayed draw term debt commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of the combined unused line of credit and delayed draw term debt commitments as ofDecember 31, 2022 to be immaterial. In conjunction with the term loan repayment by CCE inNovember 2022 , our previously outstanding$1.0 million guaranty was released and terminated. We were not required to make any payments on this guaranty, or any guaranties that existed in previous periods. The following table shows our contractual obligations as ofDecember 31, 2022 , at cost: Payments Due by Period Less than More than Contractual Obligations(A) Total 1 Year
1-3 Years 3-5 Years 5 Years Credit Facility(B)$ 29,600 $ - $ -$ 29,600 $ - Notes payable 262,488 - - 127,938 134,550 Interest payments on obligations(C) 71,288 16,654 33,319 15,849 5,466 Total$ 363,376 $ 16,654 $ 33,319 $ 173,387 $ 140,016 (A)Excludes unused line of credit and delayed draw term debt commitments to our portfolio companies. As ofDecember 31 , we had no amounts unused or outstanding. (B)Principal balance of borrowings outstanding under the Credit Facility, based on the maturity date following the current contractual revolving period end date. (C)Includes interest payments due on the Credit Facility, 2026 Notes, and 2028 Notes, as applicable. The amount of interest payments calculated for purposes of this table was based upon rates and outstanding balances as ofDecember 31, 2022 .
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity
with GAAP requires management to make estimates and assumptions that affect the
reported consolidated amounts of assets and liabilities, including disclosure of
contingent assets and liabilities at the date of the financial statements, and
revenues and expenses during the period reported. Actual results could differ
materially from those estimates under different assumptions or conditions. We
have identified our investment valuation policy (which has been approved by our
Board of Directors) as our most critical accounting policy, which is described
in Note 2 - Summary of Significant Accounting Policies in the accompanying Notes
to Consolidated Financial Statements included elsewhere in this Quarterly
Report. Additionally, refer to Note 3 - Investments in the accompanying Notes to
Consolidated Financial Statements included elsewhere in this Quarterly Report
for additional information regarding fair value measurements and our application
of Financial Accounting Standards Board Accounting Standards Codification Topic
820, "Fair Value Measurements and Disclosures." We have also identified our
revenue recognition policy as a critical accounting policy, which is described
in Note 2 - Summary of Significant Accounting Policies in the accompanying Notes
to Consolidated Financial Statements included elsewhere in this Quarterly
Report.
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Investment Valuation
Credit Monitoring and Risk Rating
The Adviser monitors a wide variety of key credit statistics that provide information regarding our portfolio companies to help us assess credit quality and portfolio performance and, in some instances, are used as inputs in our valuation techniques. Generally, we, through the Adviser, participate in periodic board meetings of our portfolio companies in which we hold board seats and also require them to provide annual audited and monthly unaudited financial statements. Using these statements or comparable information and board discussions, the Adviser calculates and evaluates certain credit statistics. The Adviser risk rates all of our investments in debt securities. The Adviser does not risk rate equity securities. For loans that have been rated by aSEC-registered Nationally Recognized Statistical Rating Organization ("NRSRO"), the Adviser generally uses the average of two corporate level NRSRO's risk ratings for such security. For all other debt securities, the Adviser uses a proprietary risk rating system. While the Adviser seeks to mirror the NRSRO systems, we cannot provide any assurance that the Adviser's risk rating system will provide the same risk rating as an NRSRO for these securities. The Adviser's risk rating system is used to estimate the probability of default on debt securities and the expected loss, if there is a default. The Adviser's risk rating system uses a scale of 0 to >10, with >10 being the lowest probability of default. It is the Adviser's understanding that most debt securities ofLower Middle Market companies do not exceed the grade of BBB on an NRSRO scale, so there would be no debt securities in the Lower Middle Market that would meet the definition ofAAA , AA or A. Therefore, the Adviser's scale begins with the designation >10 as the best risk rating which may be equivalent to a BBB from an NRSRO; however, no assurance can be given that a >10 on the Adviser's scale is equal to a BBB or Baa2 on an NRSRO scale. The Adviser's risk rating system covers both qualitative and quantitative aspects of the business and the securities we hold.
The following table reflects risk ratings for all loans in our portfolio as of
Rating December 31, 2022 March 31, 2022 Highest 9.0 9.0 Average 6.4 6.5 Weighted-average 7.3 7.0 Lowest 3.0 3.0 Tax Status We intend to continue to maintain our qualification as a RIC under Subchapter M of the Code forU.S. federal income tax purposes. As a RIC, we generally are not subject toU.S. federal income tax on the portion of our taxable income and gains distributed to our stockholders. To maintain our qualification as a RIC, we must maintain our status as a BDC and meet certain source-of-income and asset diversification requirements. In addition, to qualify to be taxed as a RIC, we must distribute to stockholders at least 90% of our Investment Company Taxable Income, determined without regard to the dividends paid deduction. Our policy generally is to make distributions to our stockholders in an amount up to 100% of Investment Company Taxable Income. We may retain some or all of our net long-term capital gains, if any, and designate them as deemed distributions, or distribute such gains to stockholders in cash. See "- Liquidity and Capital Resources - Distributions and Dividends to Stockholders." In an effort to limit federal excise taxes, we have to distribute to stockholders, during each calendar year, an amount close to the sum of: (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our net capital gains (both long-term and short-term), if any, for the one-year period ending onOctober 31 of the calendar year, and (3) any income realized, but not distributed, in the preceding period (to the extent that income tax was not imposed on such amounts), less certain reductions, as applicable. Under the RIC Modernization Act, we are permitted to carryforward any capital losses that we may incur for an unlimited period, and such capital loss carryforwards will retain their character as either short-term or long-term capital losses. Our capital loss carryforward balance was$0 as of bothDecember 31, 2022 andMarch 31, 2022 .
Recent Accounting Pronouncements
Refer to Note 2 - Summary of Significant Accounting Policies in the accompanying
Notes to Consolidated Financial Statements included elsewhere in this Quarterly
Report for a description of recent accounting pronouncements.
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